Varco Seeks to Modify Credit Agreements
Varco International Inc. is seeking to avert a technical default on its outstanding bank debt by entering into a revised agreement with its lenders.
It will be the second time in two years that the Orange-based oil service concern has been forced to modify its financing arrangements with bankers as the company has seen its earnings and value eroded by falling oil prices.
Richard Kertson, Varco’s vice president of finance, said Monday that five banks, led by Wells Fargo, have agreed “in principle” to change a covenant governing the company’s operating line of credit that requires Varco to maintain a tangible net worth of at least $26 million.
Within the next 30 days, he said, Varco and the banks expect to sign a new agreement that would reduce the net value requirement to $20 million. The adjustment was considered necessary because company officials project that if Varco’s third-quarter results approximate the $2.9-million loss it posted in the second quarter, the company’s tangible net value (the value of tangible assets less liabilities) will sink below $26 million.
Kertson said that in 1984 Varco went through a similar round of negotiations with its bankers that resulted in a new financing package and a downward adjustment in the minimum net worth requirement.
As part of the upcoming agreement, Kertson said, the banks also will extend the due date on Varco’s line of credit. Otherwise, he said, Varco would have been required to repay the banks $4 million when the line of credit was scheduled to expire next June.
Kertson said the banks have agreed to convert Varco’s revolving line of credit to a $4-million term loan that Varco will be able to repay in quarterly installments of $333,333 beginning next March 31.
T. Wayne Whipple, an oil service analyst with Merrill Lynch in New York, said he was not surprised or concerned by Varco’s proposed new financial arrangement because Varco still has positive cash flow and will be able to pay its creditors.
Noting that other oil service companies are similarly adjusting their loan covenants involving net worth, Whipple said that the banks generally have been willing to be flexible. “As long as they (the oil service companies) are meeting their payments, the banks are not going to foreclose on them,” he said.
